A big part of successful stockmarket investment – or investment of any kind – is about managing ourselves because mostly the stocks take care of themselves, it’s the humans that misbehave. The odd thing – and I think it’s really odd – is that generating reasonable long-term returns on the stockmarket isn’t very hard. Unfortunately our own minds keep getting in the way. To put them in their rightful place we need to bear in mind the following ten stepping stones:
1. Know what you want to achieve.
Incredibly most people investing in the markets don’t even write down their goals. If you don’t know where you’re going how are you ever going to get there? If you don’t have a map and a plan you’ll keep changing your mind, wandering off course, get distracted by interesting looking stuff and end up failing. Read more >>
2. Understand why investing in shares is necessary.
Stockmarket investment isn’t a game, it’s essential to protect ourselves against all the rubbish that governments, stupid bankers, grasping financial institutions and conmen can throw at us. We need to recognise why this is so because otherwise the temptation to backtrack when times get tough will be too much – and this all about the long-term. Read more >>
3. Understand history.
History? How can dull as dishwater history be important to stockmarket investors? Well, when you’re in the eye of the storm and everyone around you is panicking if you don’t have an appreciation of the history of stockmarkets and shares you’ll probably panic along with the rest of them. Once you do that you can pretty well guarantee failure. Read more >>
4. Don’t overinvest in shares. Get some balance.
There’s a tricky balance between investing in stocks and staying solvent. Stockmarkets have a horrible tendency to tank just when you’re most in need of money. Being forced to sell shares while the market is in a funk is a disaster, so having a balance between long-term debt and different sorts of investments is really important. By-the-way, short-term debt and stockmarket investment don’t mix. Don’t do it. Read more >>
5. Know your limitations. KISS.
Yep, Keep It Simple, Stupid, should be our watchword. The stockmarkets offer us hundreds of ways of throwing our money away if we don’t know what we’re doing. Sticking to what we understand and building knowledge slowly and carefully is the only safe way of making money. Investing in low-cost index trackers may be the only thing you need to make your goals, and there’s no harm in that. This is not about beating other people – it’s about succeeding in reaching your own targets.
6. Fund Managers are not your friends.
Neither are stockbrokers, financial advisors or any of the other myriad people who populate the securities industry. They want your money and they have lots of ways of persuading you to give it to them. All this will do is reduce the money you eventually make while ensuring they drive around in big cars, live in big houses and go on big vacations. And – guess what? On average they can’t even beat the stockmarket averages – you pay them your money and they damage your returns. Don’t trust them, ever.
7. Understand how to value stocks and shares.
You don’t have to invest directly in shares to make reasonable money over long enough periods, using passive funds – index trackers – can let you do this in comfort. However if you do want to buy and sell shares yourself don’t do so without understanding the basics of how to value stocks. Don’t trust stockmarket analysts or tipsters. Analysts are fed information by the companies they cover and when the companies don’t know what’s happening neither do the analysts. The best tipsters do no better than the market averages and the worst are so bad that your best option is to do exactly the opposite of what they say.
8. Use compounding to your advantage.
As your investments grow they will pay you an increasing income. If you re-invest that income instead of spending it you become wealthier, faster. This is the law of compound averages – it sounds ridiculously simple but it’s an incredibly powerful concept that’s critical to all investors. If you spend the income you’ll end up poor.
9. Learn from the very best.
Many of the greatest investors in the world are happy to give away their expertise for nothing. They don’t hide their secrets because they know most people can’t follow their advice, simply because we’re betrayed by our own minds. However, the lessons we can learn are powerful and help to reinforce the other stepping stones above – keep it simple and always know what you’re doing and why.
10. Finally – know yourself.
As I will return to again and again the human mind is almost designed to stop us making money on the stockmarket. Many of the things you need to do go against the most fundamental traits, but if you can’t conquer these urges you’ll never make money investing in stocks. It’s just impossible. You can’t avoid being human, but you can sidestep a lot of the issues if you know what you’re doing.
There’s a fairly large subset of humanity who can never be successful at stockmarket investment but not because they’re not clever enough. The trouble is that when the going gets tough – and you can guarantee that at some point it will – most people can’t take the heat.
That’s a shame, but in a way it’s necessary because for every seller there’s a buyer and vice versa so that every time someone sells too low there’s someone picking up a bargain and every time someone flips an overvalued stock there’s a sucker buying it. Our aim must be to be on the smart side of these trades as much as possible and fortunately there’s enough foolishness in the world to be pretty sure that’s always going to be possible if you follow the stepping stones carefully.
And arming ourselves to make this possible is, in a nutshell, what this blog is about.
See: Stepping Stone #1: Know What You Want to Achieve
Back to: The Psy-Fi Blog
1. Know what you want to achieve.
Incredibly most people investing in the markets don’t even write down their goals. If you don’t know where you’re going how are you ever going to get there? If you don’t have a map and a plan you’ll keep changing your mind, wandering off course, get distracted by interesting looking stuff and end up failing. Read more >>
2. Understand why investing in shares is necessary.
Stockmarket investment isn’t a game, it’s essential to protect ourselves against all the rubbish that governments, stupid bankers, grasping financial institutions and conmen can throw at us. We need to recognise why this is so because otherwise the temptation to backtrack when times get tough will be too much – and this all about the long-term. Read more >>
3. Understand history.
History? How can dull as dishwater history be important to stockmarket investors? Well, when you’re in the eye of the storm and everyone around you is panicking if you don’t have an appreciation of the history of stockmarkets and shares you’ll probably panic along with the rest of them. Once you do that you can pretty well guarantee failure. Read more >>
4. Don’t overinvest in shares. Get some balance.
There’s a tricky balance between investing in stocks and staying solvent. Stockmarkets have a horrible tendency to tank just when you’re most in need of money. Being forced to sell shares while the market is in a funk is a disaster, so having a balance between long-term debt and different sorts of investments is really important. By-the-way, short-term debt and stockmarket investment don’t mix. Don’t do it. Read more >>
5. Know your limitations. KISS.
Yep, Keep It Simple, Stupid, should be our watchword. The stockmarkets offer us hundreds of ways of throwing our money away if we don’t know what we’re doing. Sticking to what we understand and building knowledge slowly and carefully is the only safe way of making money. Investing in low-cost index trackers may be the only thing you need to make your goals, and there’s no harm in that. This is not about beating other people – it’s about succeeding in reaching your own targets.
6. Fund Managers are not your friends.
Neither are stockbrokers, financial advisors or any of the other myriad people who populate the securities industry. They want your money and they have lots of ways of persuading you to give it to them. All this will do is reduce the money you eventually make while ensuring they drive around in big cars, live in big houses and go on big vacations. And – guess what? On average they can’t even beat the stockmarket averages – you pay them your money and they damage your returns. Don’t trust them, ever.
7. Understand how to value stocks and shares.
You don’t have to invest directly in shares to make reasonable money over long enough periods, using passive funds – index trackers – can let you do this in comfort. However if you do want to buy and sell shares yourself don’t do so without understanding the basics of how to value stocks. Don’t trust stockmarket analysts or tipsters. Analysts are fed information by the companies they cover and when the companies don’t know what’s happening neither do the analysts. The best tipsters do no better than the market averages and the worst are so bad that your best option is to do exactly the opposite of what they say.
8. Use compounding to your advantage.
As your investments grow they will pay you an increasing income. If you re-invest that income instead of spending it you become wealthier, faster. This is the law of compound averages – it sounds ridiculously simple but it’s an incredibly powerful concept that’s critical to all investors. If you spend the income you’ll end up poor.
9. Learn from the very best.
Many of the greatest investors in the world are happy to give away their expertise for nothing. They don’t hide their secrets because they know most people can’t follow their advice, simply because we’re betrayed by our own minds. However, the lessons we can learn are powerful and help to reinforce the other stepping stones above – keep it simple and always know what you’re doing and why.
10. Finally – know yourself.
As I will return to again and again the human mind is almost designed to stop us making money on the stockmarket. Many of the things you need to do go against the most fundamental traits, but if you can’t conquer these urges you’ll never make money investing in stocks. It’s just impossible. You can’t avoid being human, but you can sidestep a lot of the issues if you know what you’re doing.
There’s a fairly large subset of humanity who can never be successful at stockmarket investment but not because they’re not clever enough. The trouble is that when the going gets tough – and you can guarantee that at some point it will – most people can’t take the heat.
That’s a shame, but in a way it’s necessary because for every seller there’s a buyer and vice versa so that every time someone sells too low there’s someone picking up a bargain and every time someone flips an overvalued stock there’s a sucker buying it. Our aim must be to be on the smart side of these trades as much as possible and fortunately there’s enough foolishness in the world to be pretty sure that’s always going to be possible if you follow the stepping stones carefully.
And arming ourselves to make this possible is, in a nutshell, what this blog is about.
See: Stepping Stone #1: Know What You Want to Achieve
Back to: The Psy-Fi Blog
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